Edited version of private advice

Authorisation Number: 1052247299152

Date of advice: 7 May 2024

Ruling

Subject: Commissioner's discretion - extension of time

Question

Will the Commissioner exercise his discretion under paragraph 124-75(3)(b) of the Income Tax Assessment Act 1997 (ITAA 1997) to allow you an extension of time to obtain a replacement asset for an asset that has been compulsorily acquired by a government body?

Answer

No.

This ruling applies for the following periods:

Year ended 30 June 20YY

Year ending 30 June 20YY

Year ending 30 June 20YY

The scheme commenced on:

1 June 20YY

Relevant facts and circumstances

Over 10 years ago you purchased a property.

You held the property for the purposes of generating rental income and long-term capital growth.

You also leased the property or were available to lease the property to unrelated parties during this period of ownership.

In June 20YY, a government body commenced formal acquisition of the property in accordance with your state's land acquisition laws.

You were served notices by the government body inviting you to negotiate terms for acquisition and informed that if negotiations were unsuccessful the property would be compulsorily acquired.

Negotiations were undertaken with the intention of reaching an agreement with the government body to sell the property prior to the compulsory acquisition.

In July 20YY, a contract for sale to the government body under compulsory acquisition was executed.

You immediately proceeded to pursue a replacement asset.

You sought tax advice from your tax agent on the tax implications and were informed that a replacement asset would need to be acquired by 30 June 20YY in order to benefit from the rollover. You state that you were unaware that the asset needed to be purchased by the same entity to benefit from the CGT replacement rollover provisions.

The advice from the tax agent was provided orally, but you have provided correspondence from the tax agent attesting the fact that this advice was provided.

You relied on the advice at face value, and a related entity of yours acquired a suitable replacement property with the funds received from the compulsory acquisition, but later realised when you received the later advice from your tax agent that this would not meet the requirements for you to use the rollover.

You believe you lost time because of this.

You undertook reasonable due diligence on properties and invested time for the following purposes:

•         Analysis of commercial information.

•         Assessment of feasibility.

•         Physical inspections.

•         Submission of offer.

•         Vendor negotiations.

•         Consummating the purchase.

You sought advice to confirm the purchase price of an asset for it to meet the criteria of subdivision 124-B and were informed that the asset would need to be equal to, or greater than the purchase price of the outgoing asset. You have then submitted the fact that due to the compensation being the trust's sole funding, properties above the acquisition price were not able to be pursued.

You have also struggled to find suitable properties at that price and have cited the following reasons for this:

•         Issues with the volume of properties on the market.

•         Issues with pricing due to volatile commercial real estate market.

•         Issues with the specific attributes of these properties.

•         Issues from owners being unwilling to sell.

•         Supply and demand constraints.

•         RBA interest rate hikes.

•         The conflict in the middle east.

•         The conflict in Ukraine.

•         Concerns of a global recession.

You have since identified 10 potentially suitable properties and have undertaken reasonable due diligence on each accordingly.

You have since sought advice from a property professional who has since advised you that due to market, macroeconomic and other geopolitical factors it will be difficult to acquire a property by the designated date.

You have provided a copy of this written advice.

You intend to use the replacement asset for the same purpose as the original asset.

Relevant legislative provisions

Income Tax Assessment Act 1997 section 124-70

Income Tax Assessment Act 1997 section 124-75

Income Tax Assessment Act 1997 subsection 124-75(1)

Income Tax Assessment Act 1997 subsection 124-75(2)

Income Tax Assessment Act 1997 paragraph 124-75(3)(b)

Income Tax Assessment Act 1997 section 124-80

Income Tax Assessment Act 1997 section 124-85

Reasons for decision

All legislative references are to the Income Tax Assessment Act 1997 (ITAA 1997) unless otherwise stated.

Roll-over relief for the compulsory acquisition of a CGT asset is available where the conditions outlined in Subdivision 124-B are met.

Under subsection 124-70(1), an entity may be able to choose a replacement asset rollover if a CGT asset owned by the entity is compulsorily acquired by an Australian government agency as per paragraph 124-70(1)(a).

A replacement-asset rollover allows you, in special cases, to defer the making of a capital gain or loss from one CGT event until a later CGT event happens.

Subsection 995-1(1) defines an Australian government agency as a Commonwealth, a State or a Territory, or an authority of Commonwealth or of a State or Territory.

A further requirement is that the owner of the original asset must receive money or another CGT asset or both, for the CGT event to be eligible for a rollover (subsection 124-70(2)). On satisfying these conditions, section 124-75 provides other requirements which must be satisfied if money is received for the event happening. Section 124-75 provides:

(1) If you receive money for the event happening, you can choose to obtain a roll over only if these other requirements are satisfied under s124-85.

(2) You must:

(a) incur expenditure in acquiring another CGT asset; or

(b) if part of the original asset is lost or destroyed--incur expenditure of a capital nature in repairing or restoring it.

(3) At least some of the expenditure must be incurred:

(a) no earlier than one year, or within such further time as the Commissioner allows in special circumstances, before the event happens; or

(b) no later than one year, or within such further time as the Commissioner allows in special circumstances, after the end of the income in which the event happens.

Section 124-85 outlines the consequences where money is received from the event.

Subsection 124-85(2) outlines the situations in which a gain is to be reduced, not reduced, or disregarded and is illustrated in the following table:

Table 1: Capital Gains situations and consequences

In determining whether special circumstances exist for the Commissioner to extend the period in which to acquire a replacement asset, Taxation Determination TD 2000/40 Income tax: capital gains: what are 'special circumstances' for the purposes of subsection 124-75(3) of the ITAA 1997? provides guidance on interpreting subsection 124-75(3) of the ITAA 1997 what are 'special circumstances'.

TD 2000/40 states that the expression 'special circumstances' by its nature is incapable of a precise or exhaustive definition. What constitutes 'special circumstances' depends on the facts of each case.

Example 3 in TD 2000/40 provides an illustration in which a taxpayer's asset is compulsorily acquired by a state authority. The taxpayer is then involved in a protracted legal dispute with the authority over the quantum of the compensation. In that instance, the Commissioner accepts that there are special circumstances to allow further time for the taxpayer.

Conversely example 4 highlights circumstances where the taxpayer displays ignorance as to how the law operates and a failure to procure a replacement asset by the prescribed time. The Commissioner does not accept this as a special circumstance.

Considering your situation, the circumstances outlined in the application are not of a special nature for the purposes of subdivision 124-B.

The broader market conditions, macroeconomic factors, and interest rate increases by the Reserve Bank of Australia, whilst outside of your control, are not special for the purposes of providing an extension of time to replace the asset. These factors are impacting everyone who is operating in the sector and as a result are not special or individualistic, in direct contrast to example 3 of TD 2000/40.

The advice you received from the tax agent that had the effect of not completely clarifying the fact the replacement asset needed to be acquired by the same entity and was potentially misleading regarding the need to fully expend the compensation you received in order to use the rollover, is most similar to example 4 in TD 2000/40. In example 4, the taxpayers were unaware that there was a time limit, and they did not acquire a replacement asset in time. In such circumstances where there is a misunderstanding or ignorance of the law, the Commissioner does not grant discretion or consider it as a special circumstance that prevented you from obtaining a suitable replacement asset within the 2-year time frame.

The consequences of section 124-85 outline that where the compensation received exceeds the price of acquiring a new asset the gain will be reduced to the amount by which the money exceeds that expenditure, and that expenditure will be reduced by the amount by which that gain is greater than the purchase price of the new asset.

In conclusion, the Commissioner does not grant discretion for an extension of time to purchase a replacement asset, however you still have until 30 June 20YY to enter a contract for a replacement property.

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